Every successful business has a good procurement strategy and a well-trained team of professionals that handle procurement. But what is the meaning of procurement? Is it simply acquiring goods or is there more to it?
When people ask the question, “what is procurement?”, it can be explained as the act of obtaining goods or services, in most cases for business requirements, and the entire process of transactions in order to attain the goods. It includes negotiation of numbers and prices, knowing the market value for certain items, and so on.
Business procurement would involve preparation, solicitation, payment, and final purchase along which require expertise from multiple fields of the company.
Procurement vs. Purchasing:
The procurement process sounds a lot like purchasing an object, but can they be considered the same thing? In business, Procurement is a proactive process whereas purchasing is a reactive one. Procurement is sourcing and acquiring the services the company needs to sell its product or fulfill its business goals.
Purchasing, on the other hand, is a subset of procuring, where you are involved with placing orders, receiving, and payment processes. Where procurement places importance to the value of the product over price, in purchasing, it works the other way around.
Procurement also focuses on long-term relationships with suppliers whereas purchase focuses on the efficiency of transactions and how to maximize gains.
What are the Types of Procurement Methods?
There are two main methods of procurement, direct and indirect.
Direct procurement is the item or service the company buys directly. Any spending by the company goes directly into costs for goods sold, production along with salaries for the working force, and all items that go into making the product. Procurement of the items required for the final product and the cost of its sold product will affect a company’s gross profit.
Indirect procurement is different from the direct type, indirect involving non-production based purchases, and non-essentials. These are the expenditure relating to running the company’s operations. Indirect procurement can involve obtaining office supplies, marketing materials, advertisements, accountants, and so on.
Other Types of Procurement:
Single Procurement: Single procurement is put into action when there is an order from a single client or customer and the supplier part of the production process is initiated.
Stock procurement: When goods are shipped without any specific customer order, periodically; it can be referred to as stock procurement. Here, even the supplies are attained in bulk in order to sustain the bulk shipments.
Just in time procurement:-The process is based on the just in time concept. It is defined by the supply of goods to satisfy the required stocks at a defined time. This leads to a very efficient and smooth means of procurement.
What are the Pillars of Procurement?
For any good procurement strategy to work, it must follow the 5 pillars of the procurement:
- Value for Money: The option that offers the lowest prices is not always the best. The entire process runs on a good value for money, so the buyer should get the best quality for the most affordable price instead of paying the lowest price for questionable quality or very high prices for unworthy items. Value for money should be prioritized and should drive all purchases.
- Competition: Keeping in mind other suppliers and buyers, your process of selecting vendors must be transparent and open. This creates healthy competition and benefits buyers by getting a good value for their money.
- Ethics and Moral Value: Unethical practices that lead to corruption while selecting the vendor will definitely lead to compromised quality. Companies must be transparent with their selection and purchases.
- Accountability: Records must be maintained at every level of the procurement process. A person who is in charge of this process will and should be accountable for any decision made. Better record-keeping benefits your company and finances and keeps you protected when taxes come in the picture.
- Equity: A uniform procurement process through all companies in different industries makes it easier for the market and other players to flourish while your company sees sizable gains as well.
Paying attention to procurement strategies can take your company to ideate and realize its goals and deliver on them with ease. It is also a great way to have effective cost-saving plans in motion, as a good strategy will definitely give room for negotiations.